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In addition to the general consolidation scope exceptions, ASC 810-10-15-17 lists a limited number of circumstances when a reporting entity is not required to apply the VIE model to a legal entity in which it has an interest.
Although certain of the scope exceptions appear straightforward, their application may require judgment and consideration of the circumstances. Moreover, the reporting entity must continually reassess whether a previously identified scope exception continues to apply.

2.3.1 VIE scope exception — not-for-profit organizations

This scope exception applies to all reporting entities subject to the consolidation requirements in ASC 958, Not-for-Profit Entities—Consolidation (ASC 958).

ASC 810-10-15-17(a)

Not-for-profit entities (NFPs) are not subject to the Variable Interest Entities Subsections, except that they may be related parties for purposes of applying paragraphs 810-10-25-42 through 25-44. In addition, if an NFP is used by business reporting entities in a manner similar to a VIE in an effort to circumvent the provisions in the Variable Interest Entities Subsections, that NFP shall be subject to the guidance in the Variable Interest Entities Subsections.

The exception also applies to NFP health care organizations subject to the AICPA Audit and Accounting Guide, Heath Care Organizations. Under this scope exception:
  • NFPs do not have to analyze their relationships with potential VIEs, since NFPs are not subject to the VIE model; and
  • A for-profit reporting entity is not required to apply the VIE model to an NFP unless the NFP was established to avoid consolidation under the VIE model.
In the latter case, a for-profit reporting entity with a relationship with an NFP entity should apply the VIE model to determine whether the NFP is a VIE and, if so, conclude whether the reporting entity is the NFP’s primary beneficiary.
Based on the guidance in ASC 810-10-25-43, an NFP may be a related party of a for-profit reporting entity. If so, when evaluating whether the for-profit reporting entity is the primary beneficiary of a for-profit VIE, the reporting entity must consider the involvement of the related party NFP, including any variable interest in the VIE or any power over the VIE’s significant activities held by the related party NFP.
Refer to NP 5.2 for further details on the consolidation requirements in ASC 958 for NFPs.

2.3.2 VIE scope exception — life insurance entities

Separate accounts of life insurance entities are not subject to consolidation by another reporting entity under the VIE model. ASC 944-80, Financial Services—Insurance, Separate Accounts, prescribes that separate account assets and liabilities should be included in the financial statements of the insurer that owns the assets and is contractually obligated to pay the liabilities.

ASC 810-10-15-17(b)

Separate accounts of life insurance entities as described in Topic 944 are not subject to consolidation according to the requirements of the Variable Interest Entities Subsections.

Separate account arrangements are considered to be separate investment entities and, as such, may have separate reporting requirements. For purposes of the stand-alone reporting requirements, separate account arrangements governed by SEC Regulation S-X, Rule 6-03(c)(1) are eligible for the same scope exception from ASC 810 as other registered investment companies, as discussed in CG 2.2.2. That discussion is also relevant for non-registered separate accounts subject to the AICPA Audit and Accounting Guide, Investment Companies.
ASC 944-80-25-3(d) clarifies that a separate account’s specialized accounting for investments is to be retained in the financial statements of the sponsoring insurer. That is, an insurance entity does not consolidate an investment in which a separate account has a controlling financial interest if the investment is not required to be consolidated in the stand-alone financial statements of the separate account.
Note that the scope exception for separate accounts does not extend to investments held by an insurer’s general account. An insurer must consider the consolidation implications for any investments held by its general account based on the relevant guidance in ASC 810. Further, as directed by ASC 944-80-25-3(f), separate account interests held for the benefit of a related party policyholder are to be combined with the insurer’s general account interest when the VIE analysis requires consideration of related parties.

2.3.3 VIE scope exception — “information-out”

When FIN 46R was issued, the FASB recognized that there may have been instances where reporting entities entered into arrangements prior to December 31, 2003 that, for a variety of reasons, did not permit them to obtain the information necessary to apply the VIE model.

ASC 810-10-15-17(c)

A reporting entity with an interest in a VIE or potential VIE created before December 31, 2003, is not required to apply the guidance in the Variable Interest Entities Subsections to that VIE or legal entity if the reporting entity, after making an exhaustive effort, is unable to obtain the information necessary to do any one of the following:
  1. Determine whether the legal entity is a VIE
  2. Determine whether the reporting entity is the VIE’s primary beneficiary
  3. Perform the accounting required to consolidate the VIE for which it is determined to be the primary beneficiary.
This inability to obtain the necessary information is expected to be infrequent, especially if the reporting entity participated significantly in the design or redesign of the legal entity. The scope exception in this provision applies only as long as the reporting entity continues to be unable to obtain the necessary information. Paragraph 810-10-50-6 requires certain disclosures to be made about interests in VIEs subject to this provision. Paragraphs 810-10-30-7 through 30-9 provide transition guidance for a reporting entity that subsequently obtains the information necessary to apply the Variable Interest Entities Subsections to a VIE subject to this exception.

As the excerpt states, these instances were expected to be infrequent, especially if the reporting entity was involved in the design of the entity or if the reporting entity was exposed to substantial risks of the entity.
We have noted very few reporting entities disclosing this exception in their financial statements. Considering the amount of time that has elapsed since FIN 46R’s release in 2003, we expect it to be rare and unusual for a reporting entity to invoke this exception.

2.3.4 VIE scope exception — business scope exception

Determining whether the VIE model applies to an entity that meets the definition of a business can be one of the more challenging aspects of ASC 810. The VIE model provides the following scope exception (the “business scope exception”) for reporting entities having a variable interest(s) in a business entity.

ASC 810-10-15-17(d)

A legal entity that is deemed to be a business need not be evaluated by a reporting entity to determine if the legal entity is a VIE under the requirements of the Variable Interest Entities Subsections unless any of the following conditions exist (however, for legal entities that are excluded by this provision, other generally accepted accounting principles [GAAP] should be applied):
  1. The reporting entity, its related parties (all parties identified in paragraph 810-10-25-43, except for de facto agents under paragraph 810-10-25-43(d)), or both participated significantly in the design or redesign of the legal entity. However, this condition does not apply if the legal entity is an operating joint venture under joint control of the reporting entity and one or more independent parties or a franchisee.
  2. The legal entity is designed so that substantially all of its activities either involve or are conducted on behalf of the reporting entity and its related parties.
  3. The reporting entity and its related parties provide more than half of the total of the equity, subordinated debt, and other forms of subordinated financial support to the legal entity based on an analysis of the fair values of the interests in the legal entity.
  4. The activities of the legal entity are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements.
A legal entity that previously was not evaluated to determine if it was a VIE because of this provision need not be evaluated in future periods as long as the legal entity continues to meet the conditions in (d).

The VIE model addresses situations where the voting interest entity approach may not identify the party having a controlling financial interest in an entity. When deliberating FIN 46R, the Board considered, but ultimately opposed, providing a scope exception for all businesses, believing that such a distinction was contrary to the principle underlying the VIE model. Therefore, ASC 810-10-15-17(d) is not intended to provide a scope exception to all businesses.
The business scope exception allows reporting entities to avoid applying the VIE model in circumstances where it is unlikely that the reporting entity would be required to consolidate a business (as the primary beneficiary), even if the entity is a VIE. The Board concluded that the most useful way to provide this implementation relief would be through a targeted scope exception consisting of a series of conditions that, if met, would obviate the need for further analysis under the VIE model.
The criteria in the business scope exception focus on the relationships between the reporting entity and the legal entity. Whether the entity has the characteristics of a VIE, as specified in ASC 810-10-15-14, is not relevant. Each reporting entity with an interest in the entity is required to separately evaluate its relationships with the entity. The fact that one reporting entity concludes that the legal entity being evaluated is eligible for the business scope exception does not provide the basis for another reporting entity to conclude similarly. In fact, one reporting entity may conclude that the entity meets the business scope exception, while another reporting entity involved with the same entity may not and may conclude that the entity is a VIE.
Although the application of the business scope exception may seem straightforward, it is not. The analysis involves evaluating several factors in addition to the specific facts and circumstances of the transaction. The first step is to determine whether the entity is a business. The second step is to determine whether any of the four conditions cited in ASC 810-10-15-17(d) are met. If any of the four conditions is present, the reporting entity is precluded from utilizing the scope exception. If a reporting entity concludes that the business scope exception is met, the reporting entity should evaluate whether the exception remains satisfied at each subsequent reporting period.
Is the legal entity a business?
To apply the business scope exception, the reporting entity must determine whether or not the entity is a business. ASC 805 provides a framework for entities to use in evaluating whether an integrated set of assets and activities (collectively a “set”) should be accounted for as a business or a group of assets. It includes an initial screen to determine if substantially all of the fair value of the gross assets is concentrated in a single asset or group of similar assets. If that screen is met, the set is not a business. Refer to BCG 1.2 for further guidance on evaluating whether an entity is a business.
Assuming that a reporting entity concludes that the entity in question is a business, it may invoke the business scope exception, provided that none of the conditions in ASC 810-10-15-17(d) are met.
Condition 1: design of the entity – business scope exception

ASC 810-10-15-17(d)(1)

The reporting entity, its related parties (all parties identified in paragraph 810-10-25-43, except for de facto agents under paragraph 810-10-25-43(d)), or both participated significantly in the design or redesign of the legal entity. However, this condition does not apply if the legal entity is an operating joint venture under joint control of the reporting entity and one or more independent parties or a franchisee.

ASC 810-10-15-17(d)(1) is a condition that requires an understanding of the dynamics behind the entity’s design or redesign (the “design of the entity” condition). Indicators that the reporting entity was involved in the design (or redesign) of the entity include participating in the establishment of:
  • capital structure,
  • governance structure, or
  • operating activities.
The scope exception may not be applicable if:
  • a reporting entity is involved in the formation of an entity or holds a majority financial interest shortly after the formation of the entity as it may have participated significantly in the design of the entity,
  • a reporting entity that acquires a significant financial interest in an entity, negotiates modifications to the governance provisions or operating activities of the entity, or establishes or amends a shareholders’ agreement as part of the transaction, or
  • changes to the entity’s capital structure or governance documents in connection with the acquisition of a financial interest or variable interest in an entity indicate that the reporting entity participated significantly in the design or redesign of the entity.
In connection with this analysis, the reporting entity must determine whether its related parties participated in these activities. If so, the scope exception may not be available. As described in the exception, for purposes of evaluating the design of the entity condition, related parties include certain de facto agents.
If an entity undergoes a redesign or restructuring, the reporting entity must re-evaluate this condition, taking into account the nature and extent of its involvement, if any, with those changes.
There are two instances when involvement in the design of the entity does not preclude a reporting entity from applying the business scope exception:
  • Operating joint ventures under joint control of the reporting entity and one or more unrelated parties
To qualify for this exception, the entity must meet the definition of a joint venture as defined in the ASC Master Glossary.

Definition from ASC Master Glossary

Joint Venture: An entity owned and operated by a small group of businesses (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a joint venture frequently is to share risks and rewards in developing a new market, product, or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a joint venture. The ownership of a joint venture seldom changes, and its equity interests usually are not traded publicly. A minority public ownership, however, does not preclude an entity from being a joint venture. As distinguished from a corporate joint venture, a joint venture is not limited to corporate entities.

An operating joint venture must comply with the remaining conditions in ASC 810-10-15-17(d) to qualify for the business scope exception. Refer to EM 6 for further discussion on operating joint ventures.
  • Franchisees
Absent this carve-out, all franchisee entities, as defined in the ASC Master Glossary, would meet the design of the entity condition, and because the condition was present, would be precluded from applying the business scope exception. However, the FASB does not believe that all entities holding franchise agreements are, by definition, VIEs. Therefore, to alleviate the burden of applying the VIE model to franchisees, the Board decided that the design of the entity condition does not apply to an entity that is a franchisee.
Franchisee entities must comply with the remaining conditions in ASC 810-10-15-17(d) to qualify for the business scope exception.
Condition 2: the “substantially all” test – business scope exception

ASC 810-10-15-17(d)(2)

The legal entity is designed so that substantially all of its activities either involve or are conducted on behalf of the reporting entity and its related parties.

Entities having a narrow business purpose intended to complement the reporting entity’s operating or financing activities will generally meet the substantially all test. Most questions regarding this condition involve the appropriate interpretation of the phrase “substantially all of its activities either involve or are conducted on behalf of.” This phrase is also used to characterize entities established with non-substantive voting rights (see ASC 810-10-15-14(c)), and thus we believe that this condition should be interpreted and applied in a consistent manner.
As a general rule, we believe that this assessment is primarily qualitative. Some have suggested that the phrase substantially all should be interpreted to mean that 90% or more of the economics of the entity relate or accrue to the benefit of a particular party. We believe that such a quantitative measure is only one of many factors that should be considered in evaluating this criterion. However, we recognize there may be circumstances where the economics of the arrangement are so skewed in the direction of one reporting entity that a quantitative analysis may, in and of itself, override other considerations.
Figure CG 2-2 lists indicators that may assist in the evaluation of whether the substantially all criterion has been met.
Figure CG 2-2
Indicators of whether the "substantially all" criterion have been met
Strong indicators1
Other indicators1
  • The reporting entity sold assets to the entity in an effort to remove underperforming assets from the reporting entity’s balance sheet.
  • The reporting entity sold assets to the entity.
  • The entity’s major activities include selling substantially all of its products to the reporting entity under long-term contracts.
  • The entity’s major activities include selling a majority of its products to the reporting entity, and these arrangements are expected to continue either because of long-term contracts or for other reasons.
  • The entity’s major activities include purchasing substantially all of its purchased products from the reporting entity.
  • The entity’s major activities include purchasing a majority of its purchased products from the reporting entity.
  • The reporting entity holds a non-reciprocal, fixed-price or “in-the-money” call option on the other investors’ equity investments, and/or the other investors have a fixed-price or “in-the-money” put option whereby they can put their investments to the reporting entity.
  • The reporting entity holds a non-reciprocal, fair-value call option on the other investors’ equity investments, and/or the other investors have a similarly priced, non-reciprocal put option.
  • The reporting entity is obligated to provide substantially all of any additional capital contributions that may be necessary to cover operating shortfalls.
  • The reporting entity is obligated to provide a majority of any additional capital contributions that may be necessary to cover operating shortfalls.
  • The entity performs research and development activities, and the reporting entity has an economic interest (e.g., through a purchase option) in the results of the research that constitutes substantially all of the entity’s activities.
  • The entity performs research and development activities, and the reporting entity is in a business that could capitalize on the results of the research that constitutes a majority of the entity’s activities.
  • The reporting entity has outsourced operations to the entity, constituting substantially all of the entity’s activities.
  • The reporting entity has outsourced to the entity operations that constitute a majority of the entity’s activities.
  • Substantially all of the entity’s assets are leased to the reporting entity.
  • A majority of the entity’s assets are leased to the reporting entity.
  • The principal activity of the entity is to provide financing (e.g., loans or leases) to the reporting entity’s customers.
  • A majority of the entity’s activities involve providing financing (e.g., loans or leases) to the reporting entity’s customers.
  • The principal purpose of the entity is to conduct a business that is uniquely complementary to a significant business operation of the reporting entity and is not similar to activities of other participants in the entity.
  • The principal purpose of the entity is to conduct a business that is more closely related to a significant business operation of the reporting entity and only broadly similar to activities of one or more of the other participants in the entity.
  • The economics (e.g., capital at risk, participation in profits, etc.) are heavily skewed (e.g., close to 90% or greater) toward the reporting entity.
  • The economics (e.g., capital at risk, participation in profits, etc.) are weighted (e.g., greater than 60%) toward the reporting entity.
1 With respect to evaluating these indicators, the term “reporting entity” includes the reporting entity’s related parties (as defined in ASC 810-10-25-43).
There are no broad “rules of thumb” or “bright lines” to shortcut the evaluation of the substantially all condition. Instead, reporting entities should assess all facts and circumstances; judgment is required. Absent mitigating factors (i.e., indicators that point to a different conclusion), a single item from the “Strong indicators” column may, at times, be sufficient to support a conclusion that substantially all of the activities of the entity either involve or are conducted on behalf of the reporting entity. If the reporting entity meets several of the “Other indicators,” evaluating whether the substantially all condition has been met warrants careful consideration.
To protect the brand, franchise agreements between a franchisor and a franchisee often incorporate unique terms and provisions. As a result, these agreements should be analyzed carefully. Figure CG 2-2 should prove useful when evaluating whether a franchise arrangement is designed such that substantially all of the franchisee’s activities either involve or are conducted on behalf of the franchisor. However, there may be other factors to consider in the franchise relationship, including the ability to select and set pricing of the menu (or products sold by the franchisee), as well as other indicators, some of which are described in more detail in ASC 952, Franchisors, specifically in ASC 952-810-55-2.
Condition 3: subordinated financial support – business scope exception

ASC 810-10-15-17(d)(3)

The reporting entity and its related parties provide more than half of the total of the equity, subordinated debt, and other forms of subordinated financial support to the legal entity based on an analysis of the fair values of the interests in the legal entity.

Determining whether the reporting entity and its related parties provide more than half of the financial support to the entity requires consideration of two defined terms from the ASC Master Glossary:

Definitions from ASC Master Glossary

Subordinated Financial Support: Variable interests that will absorb some or all of a variable interest entity’s (VIE’s) expected losses.
Expected Losses (excerpt): A VIE’s expected losses are the expected negative variability in the fair value of its net assets exclusive of variable interests and not the anticipated amount of variability of the net income or loss.

When evaluating this condition, a reporting entity should consider all variable interests that it and other parties have with the entity, including variable interests in the form of guarantees, management contracts, derivatives, purchase options, and supply contracts, as well as loans and equity investments. It may not be easy to inventory such interests, and related fair-value information is often not available. Therefore, this assessment may be difficult to undertake in practice, particularly in situations where the reporting entity’s financial support to the entity is substantial (and/or takes various forms).
As a practical matter, the business scope exception will generally be available only when it is obvious that the reporting entity will not absorb the majority of the economics of the entity on a fair value basis. For certain arrangements – for example, a 50:50 joint venture – it may be difficult to make this assertion. In a 50:50 venture, although the entity’s economics are intended to be equally shared, that may not be the case when viewed in more detail. There may be other commercial arrangements between the owners and the venture that constitute variable interests, such as in the form of guarantees, supply contracts, or management agreements. In these instances, absent a comprehensive analysis, it may be difficult to demonstrate that the reporting entity does not hold a majority of the economic interests in the venture. Therefore, in these circumstances, it is more likely than not that the entity will warrant evaluation under the VIE model.
Condition 4: common financing structures – business scope exception

ASC 810-10-15-17(d)(4)g

The activities of the legal entity are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements.

The assessment of this condition (the “common financing structure” condition) is relatively straightforward. This criterion is intended to ensure that entities considered “typical” SPE structures – trusts that securitize receivables, issuers of collateralized loan obligations and the like – are assessed under the VIE model.
In applying this condition, we believe that the phrase “single-lessee leasing arrangements” should be interpreted broadly. That is, we believe the term includes entities that have entered into long-term supply arrangements containing an embedded lease under ASC 842-10-15-3. When an entity is deemed to be a single-lessee leasing arrangement, the reporting entity would not be eligible for the business scope exception.

2.3.5 VIE scope exception — private company exception

A reporting entity that is a private company is not required to apply the VIE guidance to legal entities under common control (including common control leasing arrangements) if the parent and the legal entities being evaluated for consolidation are not public business entities.
The accounting alternative is an accounting policy election that a private company should apply to all legal entities under common control that meet the criteria in ASC 810-10-15-17AD. In other words, the alternative cannot be applied to some common control arrangements and not to others. If the alternative is elected, a private company will continue to apply other consolidation guidance in ASC 810, as applicable.

ASC 810-10-15-17AD

A legal entity need not be evaluated by a private company (reporting entity) under the guidance in the Variable Interest Entities Subsections if all of the following criteria are met:
  1. The reporting entity and the legal entity are under common control.
  2. The reporting entity and the legal entity are not under common control of a public business entity.
  3. The legal entity under common control is not a public business entity.
  4. The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsections of this Topic. The Variable Interest Entities Subsections shall not be applied when making this determination.

To determine if the private company (reporting entity) and the legal entity are under common control of a parent solely for the purpose of applying ASC 810-10-15-17AD(a), reporting entities would only consider a parent’s direct and indirect voting interests in the private company and the legal entity. In other words, the guidance in the Variable Interest Entities Subsections of ASC 810 is not applied when making this determination. See ASC 810-10-55-205AV through ASC 810-10-55-205AZ for illustrative examples on determining whether common control exists solely for purposes of applying the accounting alternative, and ASC 810-10-55-205BA through ASC 810-10-55-205BF for illustrative examples on the application of the alternative.
If a reporting entity meets the criteria for the exemption and then at a future date any of the criteria cease to be met, a private company will apply the VIE guidance at the date of change on a prospective basis, except for situations in which a reporting entity becomes a public business entity. If the reporting entity becomes a public business entity, the entity would apply the VIE guidance in accordance with ASC 250 on accounting changes.
A private company is required to provide detailed disclosures about its involvement with and exposure to a legal entity under common control, as specified in ASC 810-10-50-2AG through ASC 810-10-50-2AI, unless the legal entity is consolidated by the reporting entity through accounting guidance other than VIE guidance.
Refer to FSP 18.9 for more information on the necessary disclosures.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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